FHA vs. Conventional Mortgage: Which Loan Is Right for You?

FHA vs. Conventional Mortgage: Which Loan Is Right for You?

If you are buying a home for the very first time then you must consider the FHA (Federal Housing Administration) which is also a government-backed organization. This can be quite confusing if you are doing it for the very first time but you should always gain knowledge on all the available options of the market. If you have researched well then there are chances that you could save yourself a lot of dollars.
 

We have experienced many cases in which the first time home buyers have got the approval for the Type of Conventional Financing Loans. These loans are riskier as there are fewer chances of approval for a newbie but they can have fewer amounts of restrictions and can also save you from the terror of paying for mortgage insurance premiums.
 

So which is better for a first-time buyer? FHA loan or a Conventional Loan? Let us now try and understand according to certain circumstances. So we should begin with deciding which can be a better option for you out of the two. These are some comparisons which are made between them and will help you decide:
 

In past few years, we have been hearing a lot about these Best Mortgage Professionals in Dallas which have been recorded to help the first time home buyers especially the young population who has low credit scores. The statistical survey of the U.S. Department of Housing and Urban Development has shown a figure of more than 38 million single families have considered FHA as an option and 7.95 million are currently insured.
 

There was a survey done this year by the Mortgage data company Ellie Mae’s which gave us the conclusion that many home buyers have been utilizing the chances with the conventional mortgages but the younger ones have been preferring the FHA which is advantageously backed by the government as a safe option.
 

Many things and facts are yet to follow but the following are some points for a quick overview for why many first-time home-buyers prefer FHA mortgages:
 

What is an FHA mortgage?

First things first, the FHA mortgages are the loans extended to the first time home buyers via a lender who is approved. The government has a role to play in approval of the loan, it can also mean that if you have a low credit score and you do not qualify for the loan otherwise then also you might stand a chance to get this loan. It is because if the borrower is late or unable to repay the government will bear the loss, not the lender.
 

Pros
 

There is an advantage you get if you deal with an FHA loan which is- it is has been backing up the lenders with an insurance which gives them the confidence to approve your loan which otherwise might not have got approved. You can also get these loans by paying low as down payment and also with low credit scores which would not have been possible with the conventional loans. The most important and amazing advantage is that FHA is offering you the loan at lower interest rates. While FHA mortgages require owner occupancy, they do allow for co-buyers who do not live in the home as long as that co-buyer is a U.S. citizen or makes their primary residence in the U.S.
 

Cons
 

Along with the advantages, there are also certain disadvantages of this FHA mortgage loan. You are required to pay a mortgage insurance premium and that too for many years. It might be possible that you will have to pay for the entire loan period. This is that premium which makes the FHA loans possible.

There is this other disadvantage that FHA mortgages come along with many restrictions like you will be required to occupy the property. It will disqualify the applications with a history of any default loans with any of the government agency.
 

When does an FHA loan make the most sense?

If you have encountered any kind of financial mishappening or if you are just commencing with having a financial record, in that case, an FHA is the best option for you. It can also serve you the best purpose if you have a few resources and cannot afford to pay larger down payments.
 

What do I need to qualify?
 

For a good credit score and credit history, you should make sure that you are providing your proof of employment and proof of your good credit history to the providers. The score can vary from being as low as 500 but if you have a score of 580 or more your chances for approval might increase. If you are not sure of your credit score you can get it evaluated as well for free online. If your credit score falls below 50 then your approval might depend on the fact if you are able to pay the down payment of 10% in that case. The federal government requires a clean record of yours with CAIVRS database which will be a sort of proof that you have no financial obligation to the federal government.
 

Conventional loans 101
 

If you want to buy a home and you do not want any involvement of federal government in the process then the conventional loan options are the best for you. These are the loans which are offered by the private lenders without having the government backing them up. The requirements for qualifications for these loans are easier to follow than those of FHA. They are flexible in terms of the type of property you are investing in. They allow you to save a lot by eliminating the cost of the insurance premium which you had to pay in case of the FHA mortgage. According to a statistical survey, it has been shown that 72% of home buyers have preferred conventional loans.
 

What is a conventional mortgage?

It is that loan which does not require you to pay for the insurance premium as you have to pay for it in FHA loan. It qualifies for the underwriting requirements of government-sponsored Mortgage Finance Companies such as Freddie Mac and Fannie Mae. These are those loans which are usually purchased by the private lenders and giving the lenders the liquidity for maintaining the pace of making loans.

If you have been thinking that companies like Freddie Mac and Fannie Mae make loans for homebuyers directly than you are wrong. The liquidity they are providing to buy the loans is required for the optimized operation of the mortgage lenders. Thus in the return of this liquidity, the companies dictate the underwriting terms. These terms are generally more stringent than those of an FHA loan. They may involve lesser paperwork but the terms are strict for sure.
 

Pros
 

There is this best advantage that this loan provides which is that it involves a low cost in the form of Best Mortgage Insurance in USA. The mortgage insurance is required just like it was essential in FHA loans but the amount to be paid is not as high as it was in FHA. And most importantly the insurance rule is not applied to the mortgages with LTV ratios below 80%.
 

These mortgages are seriously flexible in terms like- the borrower is not required to occupy the property and he does not have to explain or claim himself to be the first time buyer.
 

Cons
 

As this loan does not involve any backing up procedure from the federal government so that restrictions which have been imposing by the lenders on the applicants may be very strict. They also ask the borrowers to pay an amount as down payment which is usually high, the DTI ratios are lower and the credit scores required needs to be high. The interest rates that are charged with these loans are also higher than in FHA.
 

When does a conventional loan make the most sense?

If you have a strong credit history and your credit score falls into the category of an excellent score then a conventional loan is the best option for you. This automatically states that you will be up for paying for a large down payment in this case if you are opting for a conventional mortgage loan.
 

What do I need to qualify?
 

First of all, you need to make sure that you have a clean and clear credit history with no financial flaws made in the recent past. An excellent credit score is a must to make sure that you get a Pre-Approval for a Mortgage Home Loan. You are also required to show your income resources and demonstrate that the total debts you have are less than 45% of your total income.
 

Head-to-head: FHA vs. conventional loan
 

Now it is so clear from the above-stated facts that the best choice amongst the two depends on your circumstances at that time.
 

You should know the fact that if you have filed up an application for being a homebuyer and you do not have any plans to occupy the property or even the co-buyer does not do the same and if you do not meet the requirements of being the first time home-buyer, then you are not applicable for FHA loan.
 

If you need that the lender should offer you lenient credit requirements then FHA is the option. They make sure that they have been offering lower interest rates, high DTI ratios, and higher LTV ratios. The waiting period after the filing of the application in case of FHA loan is for a less time especially after a major financial setback or even bankruptcy.
 

There is this one reason which has made the FHA credit requirements much lenient than the conventional ones which are- they ask you to pay for the insurance premiums to have protection against defaults. The conventional loans also require insurance premiums but the amount is much lower.
 

If you are applied for a Conventional mortgage loan and your LTV ratio falls below 80% so you are no longer in debt to pay for the insurance premium. You can avoid it and make the down payment of at least 20% amount. But in the case of FHA loans, you would have to continue paying the insurance premium for the entire length till the loan lasts.